Market structure and risk taking in the banking industry

Arbeitspapier

This study demonstrates that the common view, whereby an increase in competition leads banks to increased risk taking, fails to hold in an environment where consumers can choose in which bank to make a deposit based on their knowledge of the riskiness incorporated in the banks' outstanding loan portfolios.We show that, in the absence of deposit insurance, competition between differentiated banks will increase the returns from diversification.We offer a welfare analysis establishing that introduction of competition into the banking industry can only improve social welfare.However, competition cannot always guarantee that diversification will occur to a socially optimal extent.Finally, we show that deposit insurance would eliminate the beneficial effects of banks competing with asset quality as a strategic instrument.

Object Details

• ISBN: 951-686-592-5
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Finland Discussion Papers ; No. 22/1998

Classification and Topics

• Classification: Wirtschaft
• Subject: Risk taking in banking ; banks' portfolio diversification ; bank competition ; deposit insurance

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Shy, Oz ; Stenbacka, Rune
• Event: Veröffentlichung
• (who): Bank of Finland
• (where): Helsinki
• (when): 1998

Further information

• Handle: http://hdl.handle.net/10419/211822
• Last update: 10.03.2025, 11:42 AM CET